Are high interest rates good for savers?
Short-term goals.
Not the best choice for long-term savings – High-yield savings accounts offer much better interest rates than traditional savings accounts, but often, you won't earn enough over the long-term to account for inflation. Investments may be a better option for a longer-term, greater yield.
Generally, when interest rates are high, people will spend less and save more, as the cost of borrowing money to buy items such as houses and cars increases, whereas the return on savings deposits is higher. When interest rates are low, the opposite is true.
| Top Savings accounts. Here are the highest paying traditional savings accounts. | |
|---|---|
| Close Brothers | 5.12% |
| Virgin Money | 5.11% (max three withdrawals a year, rate drops to 2% from fourth onwards) |
| Monument Bank | 5.11% |
| Cynergy Bank | 5.1% (rate drops to 4% after 12 months) |
Higher interest rates have gotten a bad rap, but over the long term, they may provide more income for savers and help investors allocate capital more efficiently. In a higher-rate environment, equity investors can seek opportunities in value-oriented and defensive sectors as well as international stocks.
Which bank gives 7% interest on a savings account? There are not any banks offering 7% interest on a savings account right now. However, two financial institutions are paying at least 7% APY on checking accounts: Landmark Credit Union Premium Checking Account, and OnPath Rewards High-Yield Checking.
Some disadvantages of a high-yield savings account include few withdrawal options, limitations on how many monthly withdrawals you can make, and no access to a branch network if you need it. But for most people, these aren't major issues.
Like consumer prices, your savings are directly impacted by changes in inflation. As the cost for most goods and services spike when inflation increases, your savings lose value, even if the amount you have stays unchanged.
You've gained a dollar but lost buying power. Any time your savings don't grow at the same rate as inflation, you will effectively lose money. If you are a retired adult living on your savings, you can't keep up the same standard of living if inflation cuts into your purchasing power with every passing year.
The federal funds rate is worth paying attention to. In a high rate environment, loans are generally more costly, but savings accounts can earn higher yields. For those who have little or no debt and can contribute to savings, this environment could be a financial opportunity.
Are regular savers worth it?
Regular savings accounts tend to pay the highest rates of interest among cash savings accounts, but there are certain restrictions involved. Most have low maximum investment limits – you'll only be able to pay in a certain amount each month, and the overall maximum will likely be capped too.
A lower rate means that savers will earn less on their money.
With higher interest rates, interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and spending. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall.
Raising rates may help slow spending by increasing the cost of borrowing, potentially reducing economic activity to slow inflation down.
As the theory goes, if it's more expensive to borrow money or carry a balance on a credit card, consumers will spend less. When spending declines, demand will fall and, eventually, so will the price of everyday goods.
OnPath Credit Union's High Yield Checking is also a transactional account, not a savings account. But it comes with an impressive 7.00% APY that surpasses what you'd normally see from checking accounts at brick-and-mortar banks or savings accounts at online-only banks.
Right now, there aren't any financial institutions offering 7% interest on a CD.
The top nationwide rate of 5.50% APY is estimated to be the highest savings return in more than 20 years. With the Fed now holding the fed funds rate steady, high-yield savings account yields have also plateaued. But the Fed is expected to start cutting rates in 2024, a move that will push savings yields lower.
How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
Here's an example: Say you save $1,000 for a year in an account that pays 5% APY, compounded annually. After 12 months, you'll have $1,050. Then you'll start earning interest on $1,050, so after the second year you'll have about $1,100.
Is a high-yield savings better than 401k?
Usually, you would choose to invest your money for long-term financial goals like retirement because you have a longer time frame to recover from stock market fluctuations. If the financial goal is short term, say five years or less, it's usually smarter to park your money in a high-yield savings account.
FDIC and NCUA insurance limits
So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account. After all, if you have money in the account that's over this limit, it's typically uninsured. Take advantage of what a high-yield savings account can offer you now.
It's technically possible to lose money in a market account, but not in the same way you can lose money in an investment account. Depending on the terms of your money market account, you could lose value to fees and inflation.
Money deposited in savings accounts is considered absolutely safe from loss. That's because savings deposits are insured by the Federal Deposit Insurance Corporation. No one has ever lost money from an FDIC-insured account. This safety comes at a cost, however.
Some of the worst investments during high inflation are retail, technology, and durable goods because spending in these areas tends to drop.
